Julius Baer is positive on equities based on an emerging growth cycle, with the US still in expansion mode, industrial production in China rising, and global restocking supporting trade and European economies.
It still favours quality growth stocks but considers allocating fresh capital to more cyclical stocks. The second half of the year offers significant promise, with geopolitical fears and election concerns leading to more volatility but also potentially providing attractive entry points, according to Bhaskar Laxminarayan, CIO and head investment management Asia.
Although US equities remain the private bank’s top pick because of the country’s continued growth and favourable investment environment, emphasis is moving away from the Magnificent 7 stocks as their earnings growth is expected to slow.
Instead, stronger earnings momentum is anticipated in the rest of the market, including mid-cap stocks. US equities beyond the Magnificent 7 are expected to benefit from ongoing economic growth, investments in artificial intelligence (AI) across industries, reindustrialisation, and the development of a greener economy.
Quality growth tilt
Laxminarayan’s (pictured) preference for quality growth stocks is closely tied to the durability of the AI investment cycle, which benefits from companies integrating new AI-powered tools to optimise functions, cut costs, and ultimately improve the value added for their clients.
Moreover, “mid-caps are in a cyclical sweet spot”, joining the rally and offering catch-up potential.
In terms of sectors, Julius Baer is focusing on industrials because of attractive valuations that are tied to structural growth themes and to positive cyclical drivers, an accelerating restocking cycle and leading economic indicators that point to growth.
It also sees promising earnings growth for the companies in its “Next Generation Automation & Robotics” theme, which benefits not only from structural factors but also from positive cyclical drivers.
The bank advises diversification with emerging market equities, especially India for long-term growth. It is tactically overweight China due to recent positive momentum, underpinned by low valuations.
Meanwhile, “structural reforms are a game changer for Japanese equities, which are also benefiting from the amount of capital being channelled into making Japan the next semiconductor hotspot,” according to Julius Baer.
Furthermore, with the yen at multi-decade lows, Japan is attractive for tourists and offers a good opportunity for investors to build exposure to a structurally attractive market that is showing strong earnings growth.
FICC outlook
In fixed income, Julius Baer advises clients to be “agile and tactical”. Bonds will likely return to their role as income generators and diversifiers in a multi asset portfolio, as central banks will no longer be buyers of last resort for the vast increase government bond supply used to fund massive fiscal stimulus.
Among currencies, higher yields (for longer), later interest rate cuts, and the cyclical superiority of the US economy argue in favour of the US dollar for now.
Finally, gold should continue its “renaissance” as “non-Western investors seek assets beyond the reach of potential sanctions, prioritising the return of their capital over the return on their capital”.
